I know. It’s one of the last things you want to read about, but it’s one of the most crucial parts of freelance success. Don’t worry, you won’t read anything about cash flow statements, balance sheets, or profit/loss statements – they’re complete overkill for the average freelancer.
Instead, I’m going to give you some easy-to-follow tips on managing your records throughout the month so it takes less work to figure out how much money you’ve made.
Keep track of your invoices.
If you’re not invoicing your clients, start now. An invoice is just a bill that says “you owe me this much money by this date for this work.” It's sort of like what the plumber sends after fixing your leaky pipes.
Don't have an invoice template to use?
- Jenn includes an invoice template in her Web Writer’s Guide workbook.
- You can find invoice templates online by doing a search for "invoice templates."
- There is software specifically designed for invoicing. For example, I use MacFreelance.
- Use Paypal's invoice tool.
- Create your own invoice template in Microsoft Word. (Tip: save as .dot file.)
Prepare and send your invoices soon after your project is complete, or before the project is done if you require advance payment. Make sure your clients get their invoices and make sure you keep a copy for your records. I keep both electronic and hard copies for added security. (You never know when your computer might crash or your house burns down and hopefully they don't both happen at the same time).
Follow up on unpaid invoices.
Get a file folder and label it “2009 Invoices.” (You need a new folder every year.) As you receive payments from clients, mark your invoices as “Paid” and file them away. Periodically review your invoices and follow up on those that remain unpaid.
Track your expenses.
When you shop for your business items, like office supplies, shop only for business. Save your personal shopping for another trip and expense tracking will be much easier. Keep receipts for all your purchases, even if you have to print them from online.
I put all my receipts in an envelope until the end of the month when I total them up. After that, I file them away based on their tax categories, e.g. Advertising, Travel, Food, etc. (See About.com Tax Planning for a list of tax-deductible business expenses.)
Add up your net income each month.
Earlier, I talked about all those useless spreadsheets you might have learned about in your college Accounting class. I still use a spreadsheet, it’s just far more simple than anything I’ve ever learned about in school. My spreadsheet has 4 rows, 13 columns, and looks similar to this:
| January 09 | February 09 | |
| Income | $1,000 | $1,200 |
| Expenses | $105 | $90 |
| Net Income | $895 | $1,110 |
It's such a simple chart, you could just draw it out on a piece of Notebook paper. (But then, you wouldn't be able to put in a formula to calculate your Net Income.)
At the end of each month, I add up all my paid invoices and all the expenses I've paid. Then, I subtract expenses from income to get my net income - that’s how much money I made that month. I try to generate income two months in advance of spending it. For example, what I make in October is what I pay myself in December. It gives me peace of mind knowing the bills are covered for the current and next month.
Writer You Are, Accountant You May Not Be
Of course, DIY accounting is not for everyone. Some of us need accountants and there’s nothing wrong with that. Make sure you get someone who has experience working with self-employed individuals and that it’s someone you can afford. Ask for referrals from friends and family members. When you find someone you like, get a few references to see how satisfied their other clients are.
Making the System Work for You
Doing your own accounting and bookkeeping can be time consuming, especially in the beginning as you're working out a system. Once you pass that hump, you should be able to cut down your accounting time to 4-8 hours a month. Filing things away during the month makes the process a lot easier than having to spend an entire day looking for receipts and invoices only to spend another day sorting and adding them.
As your business grows, continually evaluate whether it makes sense to continue doing your own accounting or if it’s time to get some outside help.
Are you your own accountant? What are your accounting and bookkeeping practices like?
Thanks for covering this LaToya — a great start to the new Freelance Finance series! 🙂
Accounting is something I was good at (and actually enjoyed a lot) in college, but I guess there’s something more satisfying about worrying about someone else’s money instead of your own. That passion never translated to my own self-employment.
I like the idea of a very simple spreadsheet. As of now I pretty much do what you mention (jot down income and expenses to get net income for for the month), but I keep them on little index cards for each month — which I lose often, and end up re-doing when I want the info again. I’m terribly unorganized about such things. I’ve been playing with various accounting software for a few years, and could never find a package I was comfortable with — they always seem to be so unnecessarily feature-filled that it’s rarely easy to just do what I want and be done with it. Before that I kept ledgers by hand (and I actually lean towards doing that again). But I think I’ll give the spreadsheet a try. 🙂
Maybe creating some simple financial templates is in order around here. Happy to hire you to put a couple together if you want to and if you think they’d be useful to readers. 🙂
Jessie — I’ll definitely leave tax-related questions to LaToya. While there are plenty of business topics for freelancers where I can speak authoritatively, accounting and taxes do not fall under that umbrella (and I feel giving tips there would be on the irresponsible side because of that). But between LaToya, Yo, and you (I didn’t know you were involved with finance previously), I think there are plenty of folks more qualified to discuss it. 🙂
Jenn, LaToya, thank you! I managed to keep an open mind at the idea of reading accounting tips–you might know that I owned a bookkeeping business and was going to become an accountant. I’ve written a lot of finance, credit and accounting content and copy. And yet (I’m only sharing this here!!) I am gawd-awful at my freelance finances. Ridiculously bad. Pathetically!
These tips were simple, easy and will really make a difference in the management of one’s freelance business such as with an accidental slob like myself.
I would love to see a blog post about saving/subtracting taxes from earnings, too! I think this is a good thing for freelancers to hear about and I am curious to hear what you’d both have to say.
Thanks for keeping up with all the goodies!
Jesse, I can completely understand where you’re coming from. It’s like the chef who eats ramen noodles. You can do it for others, but somehow just can’t get the motivation to do it for yourself.
Taxes are definitely something I can write about in an upcoming blog. Saving for taxes is easy once you commit to it. Figuring out how much you owe (and then avoiding a heart attack when you do), is harder.
Accounting is the single worst part of freelancing–but if you follow accounting-made-simple tips like these you will stay on the right track. Nice one LaToya 🙂
I cheat. I use Xero accounting software, which lets you track your expenses, send invoices, and in New Zealand (not sure about other countries) you can arrange for it to feed your bank balances through so you can keep an eye on deposits. You can give your accountant access to it so they can work their magic.
It also helps to have an accountant in the family 😉
Over at About.com Freelance Writing, I just reviewed this really great book called Bookkeeping Basics for Freelance Writers. COMPLETE thumbs up.
There was another book I used to LOVE when it came to simplifying bookkeeping, but for the life of me I don’t remember what it’s called (even though I can still picture it in my head!). Grrrrr. I really do love accounting. I just wish I could love it as much when it came to my own work. I think the real issue is that I’m so focused on making money that taking a time out from that frustrates me so I rush through it. And while I’m fine outsourcing some things like programming, finances just aren’t something I like the idea of other people meddling with (that’s where my slight control freak tendencies finally rear their ugly heads).
@Allena, Great review. If you learned from Bookkeeping Basics even with an accountant husband, then I definitely need to put it on my to-read list.
@Jenn, I treat it as a nice little break from writing – which, as much as I love it, I can sometimes get enough of. I’m like you when it comes to finances, just a little too controlling (and cheap) to put it in the hands of someone else.
Tax time is my motivation. I don’t want to scramble around at the last minute trying to get everything together.
@Yo, Thanks for the compliments! 🙂
@Lucy, I see they have a free trial. I may test it out. I’m particularly interested in the payables piece. I just starting hiring writers and I need a way to keep up with their payments in the same place as everything else. I’m not particularly interested in linking to a bank account, but maybe that piece is optional.
@LaToya, I’m sure the bank account linking is optional – as I said, I don’t even know if you can do it outside NZ. I only just got round to sending off the forms and I’ve been using it for a few months…
One of the things I like about it is that you can play around with a fake company while you learn – it works exactly the same but you don’t risk stuffing up your real accounts!
I would add, to anyone who’s books are in a big mess, don’t panic. A good bookkeeper can make sense of anything and will be used to dealing with problems such as lost invoices / receipts etc. If you are in a mess, call a bookkeeper ASAP and take that weight from your shoulders 😉
Bev